Monday, January 23, 2012

Tired of hearing about the ECB Deposit Facility? Here is some good news.

A chart from Barclays Capital just may limit media coverage of the ECB Deposit Facility. The badly needed chart (below) shows Barcap's projections for what's called the "liquidity surplus" in the euro-system.

Euro-system Liquidity Surplus (source: Barcap)

The "liquidity surplus" represents the Deposit Facility balances plus banks' excess reserves. Excess reserves are the banks' current accounts (reserve accounts) at the ECB less the required reserves. That amount fluctuates as banks "front load" their accounts to make sure the period average exceeds the required reserve amount.

Source: ECB

The excess reserves could be either positive or negative depending on where one is in the cycle. Therefore according to Barcap's chart, the Deposit Facility should be quite stable going forward except for the excess reserve cyclicality. Since the liquidity surplus is driven by the amount borrowed from the ECB (not banks hoarding cash), Barcap's forecast must assume that the net lending to banks by the ECB has stabilized. With the 3-year LTRO significantly extending the average maturity, banks are not expected to repay their loans for a while. This will keep the net Deposit Facility balances reasonably stable, declining slightly over time.

And that is good news for those who don't want to hear about this facility any more. Since the facility is not expected to change for a while, it should result in the mainstream media staying away from covering the topic. It's just not going to be sensational enough going forward.